Saturday, December 20, 2014

Maybe the boxes of unpaid claims should have tipped off Cynthia
Holloway, trustee of the Professional Industrial Trade Workers Union
Health and Welfare Fund, situated in an office suite along Route 70 in
Cherry Hill.

All around the country - in New Jersey, Texas,
Louisiana, and North Carolina - employees, presumably covered by health
insurance, were going to doctors or hospitals, but their bills were not
getting paid.

Clearly the fund was in trouble. Financial records
were missing, state insurance departments sent cease-and-desist letters,
and insurance administrators were calling Holloway to tell her that the
fund was not forwarding enough money to pay the claims.

As it
turned out, the reason the claims were not being paid was that the fund
was a fraud and the union itself was phony, a prop to further the
scheme.

This tangled tale of deceit began to unfold a decade ago,
but legal ramifications continue - especially for Holloway, who was
soundly criticized and heavily fined last month by a federal judge in
Camden.

U.S. District Judge Joseph H. Rodriquez fined Holloway at
least $4.7 million, plus interest, saying she could have stopped the
debacle, and making her the latest casualty in this 12-year-old crime.

Lawyers
familiar with union health and welfare funds say they have never seen
such a penalty levied against a fund trustee who was not complicit in
the fraud.

The scheme's architects were business people operating
on the fringes of the staffing industry, with some ties to organized
crime, using the phony Cherry Hill union, the Professional, Industrial
and Trade Workers Union, as a front from 1999 to 2003.

On a
checkbook level, its victims were employers or employees, mostly in
small businesses around the country, who paid $7.8 million in health
insurance premiums, but didn't get coverage.

Most
of the funds were improperly diverted as "fees," "commissions," and
"union dues," and some money paid the salary of the union's president,
Franklin "Frankie the Flea" Militello, linked by federal prosecutors to
the Genovese organized-crime family.

Worse, employees and
family members, thinking they were covered by insurance, went to
hospitals or doctors and later found themselves dunned by collection
agencies, on the hook for tens of thousands of dollars in medical bills,
bills never paid by the fake fund.

There is no indication that Holloway, who supervised the fund from California, improperly received any money.

After
18 months as trustee, from May 1, 2001, to Sept. 27, 2002, Holloway
quit, expressing concerns about the "chaotic state of affairs of the
fund," in documents that wound up in court records.

But resigning did not let her off the hook, Rodriguez ruled Nov. 28.

"She
cannot ignore the kind of information that was being presented to her
and walk away," Rodriguez wrote. "Her lack of prudence enabled others to
commit a breach, of which she had knowledge, and she did not make
reasonable efforts to remedy that breach."

Holloway, who runs
Employers Depot Inc., a staffing company in California, did not return
phone calls. Her attorney said she would appeal the ruling.

"I've
never seen a fiduciary hit with that kind of penalty," said Rick
Grimaldi, a management-side employment lawyer at Fisher & Phillips
L.L.P., of Radnor.

Neither had John A. DiNome, a management-side employment partner at the Philadelphia office of the Reed Smith L.L.P. law firm.

"The
standards are very high for trustees," DiNome said. "Most of the times
the funds are fine. This is an example of the polar opposite."

In the phony union-health-fund case, there is enough legal paperwork - criminal and civil - to fill several file cabinets.

The
union "did not conduct any of the traditional activities [of a union]
except collecting dues," the U.S. Labor Department wrote in a court
filing.

Its main purpose was to establish a phony union
health-and-welfare fund for selling insurance to employers, said Mark
Machiz, who, as Philadelphia regional director of the U.S. Labor
Department's Employee Benefits Security Administration, is familiar with
the department's 2005 civil suit related to the fraud.

"The
economic niche that these bad guys operated in was the difficulty of
getting affordable health insurance, so these [employers] were
susceptible to the pitch," he said.

One employer was R.D.D.
Associates L.L.C., a North Jersey food brokerage. When $100,000 worth of
employees' claims were not paid, the firm quit the plan and filed suit.

The
insurance was touted in 2001, 2002, and 2003 by Privileged Care
Marketing Group (PCMG), Privileged Care Inc., and Northpoint PEO
Solutions, all owned or operated by James Doyle of Sewell and others.

In this and similar phony union schemes, employers were told union funds could charge less, Machiz said.

All
employers had to do was enroll workers in the do-nothing union and pay
two checks - one for union dues and one for health premiums and fees.
The legal documents do not say whether the employers were aware they
were signing up for a scam.

Before the scheme collapsed in May
2003, PCMG received $7.8 million in premiums and dues. Only $2.4 million
went to pay health claims, according to court papers.

Rodriguez
ordered Doyle, who disbursed PCMG funds to all the players, to pay $3.9
million. Doyle could not be reached for comment.

Whether Holloway, who was recruited to serve as a fund trustee, is to blame for not stopping the debacle is not clear-cut.

Initially,
in the civil case, Rodriguez ruled that Holloway had not shirked her
duties. His decision was overruled by an appeals court that sent it back
for reconsideration.

Then, Rodriguez changed his opinion,
writing on Nov. 28 that Holloway "breached her duty of prudence" to the
fund. She did not sue her fellow trustees or contact law enforcement
officials, he wrote.

DiNome, who has no connection to this case,
said some fund trustees do not fully recognize the responsibility that
comes with the job.

"You have to ask hard questions. You have responsibilities that go beyond sitting in a meeting," he said.

"That works 89 percent of the time," DiNome said. "You don't usually have a phony union."